Tag Archives: Signaling

Jason Brennan on the signaling theory of education

Jason Brennan

Here’s a thought experiment:

Suppose it turned out that Pfizer has been selling a drug, since 1850, which A) costs $240,000, B) requires four years of treatment, and C) which they claim makes patients more open-minded, smarter, better and deeper thinkers, wiser, more creative, better at expressing themselves, better at understanding others, etc.

Now suppose Pfizer not only had no proper evidence that the drug had this effect, but in fact other medical scientists had studied the drug, and over and over again found a null effect. We’d probably think Pfizer had committing fraud or engaged in negligent advertising. We’d probably demand the government shut Pfizer down or fine them. Pfizer might face a class-action lawsuit.

Fortunately, Pfizer isn’t so unethical that it would do such a thing.

However, the thought experiment above is real. Substitute “colleges,” “liberal arts education,” and “educational psychologists” for “Pfizer,” “drug,” and “other medical scientists.” Voila!

Rebecca Diamond and Petra Persson on educational signaling

Rebecca Diamond and Petra Persson:

This paper analyzes the long-term consequences of teacher discretion in grading of high-stakes tests… We document extensive test score manipulation of Swedish nationwide math tests taken in the last year before high school, by showing significant bunching in the distribution of test scores above discrete grade cutoffs… Despite the fact that test score manipulation does not, per se, raise human capital, it has far-reaching consequences for the beneficiaries, raising their grades in future classes, high school graduation rates, and college initiation rates; lowering teen birth rates; and raising earnings at age 23. The mechanism at play suggests important dynamic complementarities: Getting a higher grade on the test serves as an immediate signaling mechanism within the educational system, motivating students and potentially teachers; this, in turn, raises human capital; and the combination of higher effort and higher human capital ultimately generates substantial labor market gains. This highlights that a higher grade may not primarily have a signaling value in the labor market, but within the educational system itself.

Evidence on educational signaling from China

Alex Eble and Feng Hu have a new paper on the role of signaling in education. From the abstract:

Wages are positively correlated with years of schooling. This correlation is largely driven by two mechanisms: signaling and skill acquisition. We exploit a policy change in China to evaluate their relative importance. The policy, rolled out from 1980 to 2005, extended primary school by one year… If the primary mechanism behind schooling returns is signaling, we would expect little change in the distribution of credentials in the population, but a large increase in schooling. If skill acquisition dominates, we should see no change in length of schooling but a change in credentials. Our results are consistent with the signaling story… We estimate that this policy, while redistributive, generates a likely net loss of at least tens of billions of dollars, reallocating nearly one trillion person-hours from the labor market to schooling with meager overall returns.